by Tim McLaughlin

A question we received this week: Why aren’t we seeing
even lower rates available with higher point quotes? The
short answer is liquidity. In order to be able to offer lower
rate quotes with high point attributes, the corresponding
(lower rate) MBS securities that these loans would be
delivered into for investor delivery must be actively trading.
However, these lower rate coupons (3.5% for 30 years ->
which include 3.750% to 4.125% rates, and 3.0% for 15
years -> 3.250% to 3.625% rates) are trading on a very
limited basis, if at all. When they do trade (ex: FNMA 3.5%
30 year), we execute what we can, and offer corresponding
rates. However, until these coupons start trading on a daily,
liquid basis, it is difficult to offer high point/lower rate quotes
across the board.
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“What is a ‘short squeeze’?” With any security, where the
investor has purchased the security from a seller, but when it
comes time for the seller to deliver the loans that make up
the security, the seller doesn’t have the loans to deliver, that
results in a “short squeeze”. The event usually happens in
non-liquid instruments, which is why most pipeline hedging
takes place in very liquid, vanilla instruments (Fannie 4%
securities, for instance), rather than in securities where
liquidity may be an issue (Fannie 3.5% securities). In a short
squeeze, the price will often go up for no other reason than
the demand is much higher than the supply, if the investor
can even find the bonds to offer them back. I bring this up
because we are seeing a lot of short squeeze scenarios in
the marketplace right now, and that is causing potential price
volatility day to day, particularly when you analyze the lower
rate coupons or specified trades, such as high balance
(north of $417K) securities.
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The market seems very concerned with next week’s Fed
meeting, since the economic recovery seems to be faltering.
There is conjecture about what the Fed will say and do,
stimulus wise, if anything. Also up for debate is what the
government will do with all of the cash that is coming in from
maturing asset holdings (i.e. – the MBS Purchase Program),
or mortgages that are paying off early. Will they reallocate
the funds within the central government, or will they funnel
the proceeds back into the MBS market for more
purchases?

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